eBay Remains a Solid Bet After Earnings
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In the world of e-commerce, two giants have arisen to dominate the market. One of these is Amazon (NASDAQ: AMZN), a very good company that unfortunately has a laughably high valuation. The other is eBay (NASDAQ: EBAY), an equally strong company with a far more reasonable valuation. This week eBay reported earnings that slightly beat the consensus, and the firm also raised its full-year guidance. In this article I will outline some of the reasons I believe eBay is an attractive choice at the moment.
eBay, with a market cap of nearly $62 billion, is one of the world’s largest global commerce platforms. After selling Skype to Microsoft some time ago, eBay’s core business is now divided into two segments. The first of these is e-commerce, in which it has a well-established name. This division accounts for about half a total revenue and just over half of profits.
The other core division is Payments, which operates largely through the Paypal brand. Paypal is good for about a third of revenue, and is the company’s fastest growing division. According to eBay's CEO, Paypal’s global reach is a strong competitive advantage, and one that should allow eBay to continue growing profits in the future.
The company’s most recent earnings report, released on Wednesday, is encouraging. eBay reported Q3 2012 EPS of $0.55 which beat estimates by a penny. Revenue was in-line at $3.4 billion, which represents a 15% rise year over year. Paypal, which has over 117 million users worldwide, put up especially strong results with revenue up 23% year over year and transaction volume up 20%. Marketplace revenue growth was a little less impressive at 9%, partly due to tough competition from Amazon in the developed markets, and Alibaba in China, in which Yahoo! (NASDAQ: YHOO) has a large stake. Aside from these earnings that were mostly in-line, eBay also raised full-year guidance slightly.
Valuation and metrics
Let’s take a look at some of the firm’s fundamentals. eBay has a P/E of 16.85x earnings, which is lower than the industry average of 18.25x and certainly lower than Amazon’s ridiculous 295.5x earnings. eBay trades at a reasonable 3.23 to book and has a solid return on equity of 19.24. Debt isn’t too much of an issue for the company, as the LT debt to equity ratio stands at about 8.5. The company has a nice operating margin of 20.6%. Based on these valuations, the company doesn’t look very expensive at all.
Of course, partly due to the global economic downturn, eBay faces a number of risks in the near future. One of these, as previously mentioned, is strong competition from the likes of Amazon and Yahoo!’s Alibaba. This may put pressure on the company’s margins. Another risk, as a result of the company’s global reach, is its sensitivity to negative Forex translation. Finally, Paypal may face increased competition from rival payment systems.
In summary, I believe that eBay’s most recent earnings report paints an optimistic picture of the company’s prospects in the near future. Earnings as well as revenue were largely in line with expectations, which were quite high to begin with. Also, based on fundamental valuations, the company looks quite inexpensive at the moment, especially compared to Amazon, its largest competitor. eBay may thus be of interest to those looking to capitalize on growth in E-commerce and electronic payments.
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